Unhealthy policy

Print edition : March 02, 2002

Pharmaceutical Policy 2002 reduces to the minimum all controls on drug pricing, thus putting the health of the people at the mercy of multinational corporations.

PEOPLE'S health is no longer the focus of the new, blatantly pro-industry, national drug policy. Cleared by the Cabinet Committee on Economic Affairs (CCEA) on February 4, and leaked to the press in parts, the policy document was formally released on February 15. For some reason the new policy is labelled "Pharmaceutical Policy 2002" as against the label of "Drug Policy" for the 1986 document and its revised version of 1994. Just how much the drug policy is concerned with the health of the people is evident from the fact that it precedes the new health policy, which is expected to be announced in the next few months.

The 1986 policy statement had public health as its basic premise even though the implementation of the policy has left a great deal to be desired. The post-1991 economic liberalisation process and the consequent progressive dilution of the price regulatory mechanism - called the Drug Price Control Order (DPCO) - are two of the reasons for the state of the public healthcare system being what it is today. Now even that intent of public healthcare has been given up. The trade and commercial aspects of pharmaceuticals have been accorded overriding importance. Only a facade, in the form of opening remarks that "the basic objectives" of the 1986 policy "still remain largely valid", now remains.

The following remarks in the new policy statement set the new premise: "The drug and pharmaceutical industry in the country faces new challenges on account of liberalisation of the Indian economy, the globalisation of the world economy and on account of new obligations undertaken by India under the WTO (World Trade Organisation) Agreements. These challenges require a change in emphasis... and the need for new initiatives... towards promoting accelerated growth of the pharmaceutical industry and towards making it more internationally competitive."

Accordingly, the thrust of the new policy seems to be aimed at allowing a rise in drug prices by diluting the DPCO substantially from its already weakened form of 1995, something which the industry has been lobbying for long. The pharmaceutical industry's response has been on expected lines. It would like the remaining controls also to be removed and the entire DPCO mechanism, which was put in place in 1970 and was revised in 1979, 1987 and amended in 1995, abolished. From a total of 166 drugs then under price control, the number was brought down to 74 in 1995 and to just 35 or so now - a near-halving at every revision. In 1995, the 74 drugs and their formulations that were under price control constituted about 40 per cent of the total market. In the present policy, the span of control has been reduced to 22 per cent. To put matters in a sharper perspective, there are 279 drugs listed in the National Essential Drug List (1996) of the Ministry of Health and Family Welfare (MoHFW) and 173 entries are termed important by the Ministry from the point of their use in its various health programmes.

According to a press statement issued by the Federation of Medical and Sales Representatives' Association of India (FMRAI), which has described the new policy as a "major assault on people's access to essential drugs", the Ministry of Chemicals and Fertilizers (MoCF) had earlier circulated secretly a document, Pharmaceutical Policy, 2001, which has now got the Cabinet's approval.

At a pharmaceutical unit. The commercial aspects of pharmaceuticals have been accorded overriding importance in the new drug policy.-RAJEEV BHATT

The gradual dismantling of the regulatory framework in the pharmaceutical sector has already been in evidence for some time. Industrial licensing for the manufacture of drugs and pharmaceuticals stands abolished (except for bulk drugs produced by the use of genetic engineering, bulk drugs that require in-vivo use of nucleic acids and specific cell/tissue-targeted formulations). Foreign investment in the sector through the automatic route was raised from 51 per cent to 74 per cent in March 2000 and to 100 per cent in December 2001.

According to the document, the following two factors formed the raison d'etre of a new policy: a) The need to improve incentives for research and development (R&D) in the pharmaceutical sector and to enable the industry to achieve a sustainable growth pattern in view of the anticipated changes in the Patent Law; and, b) The need for "reducing further the rigours of price control particularly in view of the ongoing process of liberalisation".

The reports of two committees constituted by the government in 1999 have essentially formed the basis of the new policy. One, the Drug Price Control Review Committee (DPCRC) under the chairmanship of the Secretary, Department of Chemicals and Petrochemicals; and, two, the Pharmaceutical Research and Development Committee (PRDC) under the chairmanship of R. A. Mashelkar, the Director-General of the Council for Scientific and Industrial Research (CSIR). While the report of the latter has been made public, that of the former, the more relevant and a possibly contentious one, was not.

It is interesting to quote from the background note circulated by the government to the DPCRC prior to its deliberations. "DPCO is used as one of the essential instruments to achieve the objective of essential medicines of good quality, at reasonable prices, for the required health care of the masses. It has been an evolutionary process, which has been taking cognisance of ever-emerging new factors and their resultant effect on the availability of drugs at reasonable prices... controls have been gradually diluted with the promulgation of each subsequent order. However, the common feature of price control has been the principle of selectivity with the aim of product-wise price control, mainly based on the extent of mass usage of drugs."

The key "ever-emerging new factor" that the note identified was the inadequate machinery to administer the price control orders, leading to the concept of selectivity. It further observed that the determination of criteria for the selection of drugs under price control was a ticklish problem because of the need to strike a balance between the interests of the consumer and the manufacturer. "Therefore," the note said, "certain working principles were evolved and applied across the board... Industry, keen to get rid of price controls altogether, has time and again questioned these working principles... To make matters worse, industry has not been forthcoming in providing data to substantiate their claims."

The failure to evolve an effective mechanism to monitor the pharmaceutical industry's adherence to the DPCO, coupled with the liberalisation of the economy, has led the government to advance the dubious argument - at the behest of pharmaceutical companies - to justify the removal of price controls that market mechanism and competition will help check and stabilise drug prices. The questionable premise of selectivity on mass usage principle for price control has been further used to whittle drastically the list of drugs under price control.

The pharmaceutical sector is not like any other sector; it is a seller's market and the consumer, the public, has no choice in the matter because the interface between the product and the patient is through the doctor for whom the issues of price and affordability are secondary or the chemist who has no interest in selling cheaper drugs. Soon after the 1995 round of decontrol and the resultant reduction in the number of drugs under price control, the prices of drugs went up. Indeed, the policy statement makes the observation: "Although the prices of some bulk drugs have been steadily decreasing, yet the same do not get reflected in the retail price of non-scheduled formulations." But it ends up - based on that very dubious market figures - diluting the DPCO.

An analysis carried out by the Delhi Science Forum (DSF) on the impact of the 1995 decontrol throws up some interesting facts about the "market behaviour". The price movement of 28 essential drugs - eight under price control and 20 outside it - showed that out of the eight controlled drugs there was a decrease in six of them. On the other hand, the prices of the 20 drugs showed an increase in excess of 10 per cent and in some cases in excess of 20 per cent. More interestingly, the DSF analysis showed that in all segments there were wide variations in the prices of different brands of a given formulation and the top-selling brand in any formulation is not the cheapest one, sometimes twice as expensive. This is proof enough that the market mechanism does not stabilise drug prices and the market share of a brand is not dependent on its price. In fact, the very reason for putting in place a price control mechanism was this atypical market behaviour in the case of pharmaceuticals.

The DSF also analysed the increase in prices of 50 top-selling drugs between February 1996 and October 1998. It showed that the average increase in the case of brands under price control was 0.1 per cent whereas that in the case of brands outside price control was 15 per cent. It was also found that the price rise was not a one-time increase owing to an escalation in raw material costs but was indicative of a trend of continual increase in the prices of decontrolled drugs, Amit Sen Gupta of the DSF said.

Sen Gupta said that there was a prevailing myth that drug prices in India were the lowest in the world. "This is at best a partial truth. Drugs that are still patent-protected are much cheaper in India than elsewhere because of the 1970 Patents Act and we have lost this advantage after its amendment in the wake of TRIPS (Trade-Related aspects of Intellectual Property Rights). But for many off-patent drugs, which account for 80 to 85 per cent of the current drug sales in the country, prices are higher in India than in Sri Lanka and Bangladesh and even in Canada and the United Kingdom. In the United States, the U.K. and so on, there are effective price control mechanisms and bodies to monitor drug prices. When we argued that the change in the Patents Act would result in an increase in prices, the government said that it would use the mechanism of DPCO to keep the prices in check. Now that the Patents Act has been amended, the TRIPS argument is being used to dismantle the DPCO, confirming our fears."

The selectivity criteria (for mass usage) used this time round are as follows: A bulk drug (and all formulations containing it, either individually or in combination with other bulk drugs) will be kept under price regulation if the value of the turnover of the bulk drug in question - defined by some criteria - is more than Rs.25 crores and the percentage of the market share of any of its formulators is at least 50 per cent; and in case the turnover of the given bulk drug is less than Rs.25 crores but more than Rs.10 crores and the percentage share of any of the formulators is at least 90 per cent.

Further, the policy has accepted the recommendation of the DPCRC that low-cost drugs measured in terms of "cost per day per medicine" may be taken out of price control. A figure of Rs.2 per day has been fixed by the policy and the National Pharmaceutical Pricing Authority (NPPA), based on the formulator's representation, can recommend a particular drug to be exempted from price control. This particular provision seems to make sense because if the price of a drug is kept low without the intervention of the DPCO, there is no need for a regulatory mechanism but only a monitoring mechanism to see that the price limit is maintained even after the drug's exemption.

There is, of course, the usual caveat in the policy statement that the government reserves the right to intervene and bring a decontrolled drug back under control if the situation - such as an abnormal increase in price or monopolistic practices - warrants. For instance, the policy states that in the case of drugs/formulations that are listed by the MoHFW and are currently under price control but do not fall under the new criteria, the NPPA will monitor their price movements and consumption patterns in order to review their decontrol status if required.

The selectivity criteria adopted until now, following the 1995 DPCO, were: Include drugs that have a turnover of Rs.4 crores or more. However, if there are five or more producers of the bulk drug and 10 or more formulators with none of them having a market share of more than 40 per cent, it may be excluded. Include drugs that have turnover of Rs.1 crore or more if a single formulator had a market share of at least 90 per cent.

The present selection would seem as arbitrary as the earlier one. What constitutes mass usage - sale volume or value? Either way one could end up with the wrong selection criteria. For example, an anti-diabetic drug, listed as an essential drug but required to be taken only once a day, might be low in volume as well as value. Conversely, a very expensive drug, low in volume sales, could show up as having a high turnover. Similarly, a reasonably low-priced essential drug, but consumed in large quantities, might be missed out because the total turnover could still work out to be low. So the bottom line should be that the selection should be based on health need - namely, the list of essential drugs - and not on market behaviour which, in the case of drugs, does not follow the norms of other consumables. But this has been the problem with the Indian drug policy over the past four decades, in which the inputs of the health sector are never reflected in the policy articulated by the Department of Chemicals and Petrochemicals which in turn is influenced by the industry lobby.

In arriving at the selection criteria, the present policy statement has rejected the new criterion recommended by the DPCRC to ascertain the mass consumption nature of a bulk drug on the basis of the top-selling brand, on the grounds that it gives rise to anomalies. Yet, the policy does not offer any justification as to the final set of criteria that has the effect of keeping three-fourths of the drugs in the market out of price control. The basic data source that the DPCRC has used is the "Retail Store Audit for Pharmaceutical Market in India", published by ORG-MARG in March 2001, which lists all major brands and their sale estimates on an all-India basis.

The policy statement admits that no reliable data exist to ascertain mass consumption and the absence of sufficient competition in respect of a particular bulk drug - the two criteria used for the selection of controlled drugs. However, says the document, in the absence of any exhaustive and comprehensive information, the ORG-MARG data are the best available. According the ORG-MARG database, 23 drugs belong to the first selection criterion, Rs.25 crores turnover and 50 per cent market share of any formulator, and 12 belong to the second. However, the NPPA is expected to come out with the final list of controlled drugs in May, which may include other drugs in addition to those on the ORG-MARG list, in particular the "less than Rs.2 cost per day per medicine" category.

In addition to making higher profit margins for the manufacturer possible, the policy has done away with the ceiling on profitability on formulations that existed until now (vide the Third Schedule of DPCO 1995). In case of bulk drugs, the manufacturer has been allowed a 4 per cent higher rate of return over the existing 14 per cent on net worth or 22 per cent on the capital employed. Considering that more and more manufacturers are moving away from bulk drug manufacture to formulations, this provides an additional windfall. With no restriction on imports, pharmaceutical imports (which is largely of bulk drugs) have been rising at the rate of 29.3 per cent while exports (which are mainly of formulations) have been increasing at the rate of 18 per cent, according to the data of the Centre for Monitoring of Indian Economy (CMIE).

That the government should indulge in such massive decontrol exercise "to promote accelerated growth and improve competitiveness" defeats logic because pharmaceutical stocks, even during the current slowdown of rest of industry (except for the automobile sector), were the most robust in the last quarter of 2001. Now, with the announcement of the new policy, the pharmaceutical stocks, in particular those of multinational corporations (MNCs), have further shot up.

THE move to allow 100 per cent automatic foreign investment in the pharmaceutical industry is not likely to bring any large investment for production or technology or R&D, as MNCs are able to widen their markets now through imports alone. Further, Indian firms are increasingly turning into trading houses for MNC products. The existing MNCs have already shut their bulk drug production and R&D units. And the impending change in the patent regime will only aggravate this trend when the indigenous drug industry and R&D base would be completely eroded because of the removal of competition and the absence of any regulatory framework. While the new policy includes some measures on the R&D front based on the recommendations of the Mashelkar Committee or the PRDC, the policy puts forward no clear strategy that will counter this disturbing trend.

The Mashelkar Committee had recommended the establishment of a pharmaceutical R&D support fund (PRDSF), which will derive its finances from a 1 per cent surcharge on the maximum retail price (MRP) of all pharmaceuticals sold in the country to be collected by the Central Excise or other authorities concerned. An estimated Rs.100 crores should accrue to this fund annually. The committee had also recommended the setting up of a drug development promotion board (DDPB) to administer the utilisation of the PRDSF on the lines of the Technology Development Board (TDB), which administers the analogous technology development fund being created from the 5 per cent R&D cess on all technology import payments.

The new policy has approved, in principle, the setting up of the PRDSF under the administrative control of the Department of Science and Technology (DST), which will also constitute a DDPB. Hopefully, this "in principle" approval will be translated into an implementable measure through an act of Parliament. If the time taken over the TDB is any indication, the government machinery moves rather slowly on such matters. Of course, the experience of the highly successful TDB should greatly facilitate the take-off of the PRDSF once it is created. The Mashelkar Committee had also recommended several fiscal incentives to spur R&D in the drug sector. The new policy has endorsed these incentives, which include tax holidays and import duty exemption on raw materials, equipment and special consumables for R&D.

However, the basic premise on which the Mashelkar Committee worked remains questionable. Indeed, this premise is one of the chief arguments used by the DPCRC to dilute the DPCO under the new policy. The committee had observed that stiff price control measures under the DPCO left little scope for the firms to generate resources for R&D. This argument is dubious because the progressive reduction in the control span under the DPCO - down to 40 per cent after 1995 - does not result in any corresponding increase in R&D spending by the pharmaceutical companies. The overall R&D expenditure by the Indian drug industry (comprising about 150 companies) remains at a meagre 2 per cent of the total turnover. There is no guarantee, points out Sen Gupta, that the control relief will be channelled into R&D and not used to fatten the balance sheets of individual companies.

DPCO 1995 provided several incentives to drug manufacturers for R&D, which exempt them from price control. But the companies that have qualified for this price control exemption on grounds of indigenous R&D efforts over the years are fewer than the fingers on one hand. Interestingly, the Mashelkar Committee had set certain 'gold standards' for a company to qualify as an R&D-intensive company eligible for price benefits under the DPCO. Considering that hardly any company has qualified for exemption from the DPCO even without such standards being set, it is highly unlikely that such 'gold standard' companies would emerge as desired by the committee. Now that most drugs have been put outside DPCO controls, the DPCO does not any longer offer an incentive for R&D.

The upshot is that to meet the emerging challenges, in the wake of globalisation and the impending new product patent regime on the one hand and the new developments in the area of biotechnology on the other, there is no substitute for enhanced public spending in drug R&D. Even in advanced countries such as the U.S., significant R&D in pharmaceuticals is still public-funded. Indeed, what the country needs is a paradigm shift in medical research, drug development in particular, with a national-level strategic planning and new institutional mechanisms in public funded R&D.

Product development requires different levels of expenditure and facilities compared to the infrastructure available in public funded laboratories today, which possibly are good for the initial phase of discovering new molecules. Unfortunately, economic liberalisation has meant a squeeze on public spending on medical and biotechnology research in general, which in any case was only a little over 2 per cent of the overall government R&D expenditure. But there is no mention of improving public-funded R&D in the new policy statement.

The policy makes only cursory remarks about the aspects of quality control and education and human resource development, which should actually have received greater attention, especially with the increase in the spread of spurious drugs in the market. With licensing completely abolished, it is going to be even more difficult to keep a check on quality. The policy has endorsed the recommendation of the Mashelkar Committee to establish a new structure for the Central Drug Standard Control Organisation (CDSCO) under the MoHFW. With no clear indications of where the funding and manpower will come from, the hope of establishing a network of "world class" CDSCO laboratories can at best be a fond hope, if not mere rhetoric, like the rest of the policy document with matters regarding healthcare.

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